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Sustainability
Sustainability: aligning corporate
governance, strategy and
operations with the planet
741
Wayne Cartwright
Department of International Business, University of Auckland, Auckland,
New Zealand, and
John L. Craig
School of Geography and Environmental Science, University of Auckland,
Auckland, New Zealand
Abstract
Purpose – To demonstrate that mainstream current ethical stances of corporate governance and
associated strategic and operational management are contributors to global unsustainability, and to
discuss issues and approaches for bringing governance and management into alignment with
sustainability.
Design/methodology/approach – A representative model of a business is used to predict
outcomes for financial wealth creation and environmental sustainability under mainstream ethical
stances for corporate governance.
Findings – Analysis of the model concludes that, given these stances, enhanced management
practice and/or technological innovation is unlikely to take such businesses above the threshold of
sustainability. This leads to proposal of a model that demonstrates seven alternative pathways to
achieving alignment of governance and management with planetary sustainability. One pathway
retains current mainstream ethical stances, that must be constrained by government interventions.
The other six pathways show alternative influences that cause corporates to shift their ethical stances
autonomously and hence to change governance and management strategies and action.
Research limitations/implications – The paper reaches theoretical conclusions that could be
further developed as research propositions for empirical testing and raises issues that can be
considered directly by corporate directors and managers.
Originality/value – The paper introduces models and analysis that have not appeared elsewhere in
the literature.
Keywords Governance, Globalization, Sustainable development, Ethics, Management effectiveness
Paper type Conceptual paper
Introduction
This paper is based on acceptance of the hypothesis that the current level of global
economic activity is placing a burden on the ecological systems of the planet that is
continually degrading the ability of these systems to absorb the gaseous and
water-borne wastes and toxins arising from economic activity. Not only is the natural
environment unable to cope with the inflow of pollutants, but also the accumulation of
these is reducing the level of economic activity that could be sustainable in the future Business Process Management
(Wackernagel et al., 2002). Hence, for the purposes of this paper we accept that current Journal
Vol. 12 No. 6, 2006
aggregate economic activity on planet Earth is unsustainable. pp. 741-750
q Emerald Group Publishing Limited
Since, environmental unsustainability implies very severe negative impacts for 1463-7154
much of human civilisation, we also assume that communities and civilisation as DOI 10.1108/14637150610710909
BPMJ a whole will at some time in the future recognise imperative needs to address the
12,6 issues, reverse the environmental impacts of economic activity, and to strive towards a
sustainable balance between human activity and the natural ecologies upon which this
activity ultimately depends. To not do so would imply that human society is locked
into a path towards inevitable self-destruction, a proposition that we are not prepared
to accept without exploration of alternatives.
742 In this paper, we explore an aspect of global and local economic activity that we
consider to be one of the major reasons for the current unsustainable pathway, and will
therefore become a focus of attention when the imperatives of global sustainability are
recognised. This aspect of economic activity is corporate governance, and especially
the comparative rigidity and narrowness of its dominant underpinning ethical stance.
There has been no shortage of proposed specifications for a sustainable future. For
instance, the Bruntland (1987) definition suggests the criterion of intergenerational
equity, although it fails to address the matter of whether the prior condition is itself
sustainable. The Natural Step Framework (Robert et al., 2002) offers a more rigorous
view of planetary sustainability, and is based on core scientific principles. These
specifications, and others, provide criteria for achieving planetary and social survival
and success. The broad logic of their macro-level objectives is no doubt comprehended
at a personal level by many directors and managers of businesses, yet it is apparent
from the current overshooting of the Earth’s sustainable capacity for economic activity,
that such personal understandings and logics are not generally carried through into the
behaviour of businesses.
We will show that a major reason is that the performance expectations and
processes of mainstream corporate governance and strategic business management act
as a major obstacle to adoption of the principles of global sustainability by corporate
directors and business managers. While this condition continues, human society
should not look to the business community for solutions to global unsustainability. We
analyse this situation, and explore the possibility of governance and management
becoming proactive in reversing global unsustainability.
The paper proceeds by first reviewing alternative ethical stances to corporate
governance, which are based on different stakeholder perspectives. The concept of
including the biosphere (Earth) as a stakeholder is then introduced as a necessary
component of the analytical model that follows. This model demonstrates that the
ethical stances that guide mainstream corporate governance are inconsistent with
global sustainability. The implications of alternative ethical stances are then reviewed,
which leads to discussion of how corporate governance could be brought into
alignment with the requirements of global sustainability.
Although the practice and structures of corporate governance differ internationally, all
models emphasise the pre-eminence of shareholders (also sometimes referred to as
owners or investors). Other corporate stakeholder groups, such as customers,
suppliers, partners and staff, typically are considered only in the context of their
influence on business revenue and costs, and hence on their net contribution to
shareholder wealth. This primary concern with shareholders is a reflection of the
ethical stance chosen by corporate governance decision makers. Following Johnson
and Scholes (2003), Figure 1 shows alternative corporate ethical stances.
Stances (1) and (2) both accord centrality to shareholders but with differing time
horizons. When shareholders expect a continual flow of returns, which is now common
in economies such as the USA where high proportions of corporate shares are owned
by investment and pension funds, the governance process and tasks delegated to
management focus attention on short-term results. This results in ethical stance (1).
Alternatively, when shareholders choose to be more patient about the timing of returns
and wealth creation, governance and management adopt a longer-term perspective,
albeit still focussed on shareholder value, so that ethical stance (2) underpins corporate
governance.
Ethical stances (3) and (4) recognise obligations to stakeholders beyond
shareholders in the sense that they are seen to have needs and expectations
independent of their contribution to shareholder interests. In practice, these stances
vary widely. In the most conservative and common form of ethical stance (3), referred
to as Corporate Citizenship (Wood and Logsdon, 2002), the interests of shareholders
remain primary, with a narrow additional focus on the communities in which the
corporation is embedded, and often linked explicitly to commercial considerations. In
contrast, the proactive perspectives of ethical stance (4) are found in businesses that are
in the vanguard of acceptance of corporate responsibility for impacts on society and
the environment.
Multiple
Short-term Longer-term Multiple Stakeholders
Shareholder or Shareholder or Stakeholder or and shaper of
interests interests obligations Figure 1.
society
The ethical stances
available to corporate
governance
Source: Adapted from Johnson and Scholes (2002)
BPMJ Accepting that the mainstream of corporate governance relies on ethical stances (1) and
12,6 (2) – with emphasis on (1) – this paper first explores the influence of these stances on
adoption by businesses of practices that are consistent with global sustainability –
which we refer to as sustainability management. Our arguments then proceed to
consider the conditions by which ethical stances (3) and (4) could support more
effective sustainability management.
744 Thus, as shown in Figure 2, mainstream corporate governance founded on ethical
stances (1) and (2) stresses accountability to shareholders for financial performance
and further accountability in terms of compliance with the law, all of which is achieved
through corporate leadership and management of strategic direction. We will
demonstrate that these requirements for functionality expand substantially when a
corporation moves towards global sustainability by adopting ethical stances (3) or (4).
Leadership Accountability
Figure 2. Direction
The essential
functionalities of
mainstream corporate
governance Performance
G
Sustainability
Intensified
Global
Sustainability B
GLOBAL
ENVIRONMENTAL
IMPACT Threshold Of D J 745
Sustainability
C I
Intensified
Global
Unsustainability A F
Figure 3.
Model of outcomes, for
0 Threshold of GROWTH OF SHAREHOLDERS Increasing
Corporate WEALTH Contribution wealth and environment
Financial to Wealth from business activity
Viability
business on the global environment over the same period. The environmental
dimension has a threshold of global sustainability; if the business operates above this
point it contributes to intensification of global sustainability whereas if it is below the
threshold, the business intensifies global unsustainablity. This concept of a
sustainability threshold for a business is admittedly simplistic. In practice, a
business may well engage in some activities that aid global sustainability and others
that detract from it. Thus, the threshold can best be conceptualised in terms of net
impacts. The shareholder wealth axis also has a threshold. Below a particular level of
financial performance, the business becomes unviable because its returns to
shareholders are insufficient to retain their investment.
The convex curve AB represents the opportunity for the business to deliver
combinations of growth in wealth and environmental impacts, given a particular
endowment of resources, assets, technologies, knowledge and management
capabilities. If the business is operating on the curve it is technically efficient. If it is
operating under the curve it could improve efficiency by attaining more wealth for a
given environmental impact, or reduce this impact while retaining a particular wealth
outcome. Clearly, for the business to contribute to global sustainability, it must operate
between points D and B, or under this part of the curve and above the threshold of
sustainability. In sharp distinction, a business managed optimally according to the
mainstream ethical stances (1) or (2), and able to avoid any costs associated with its
external impact on the environment, will operate at point A, since this maximises the
dominant shareholder expectation of maximisation of incremental wealth. More
realistically, the business is likely to incur significant compliance costs relative to its
environmental impact, which will result in it operating at a point such as C, which
maximises shareholder wealth subject to compliance with environmental laws.
BPMJ The model demonstrates clearly a sustainability gap, represented by either AD or
12,6 by CD, between the contribution to environmental degradation associated with
financially rational governance, and the threshold of sustainability. We propose that
this phenomenon is a major cause of the current global pathway of unsustainability. Of
course, there exists the serendipitous possibility that the wealth-maximising position,
C, is actually between D and B, due to either an extremely environmentally-friendly
746 business model or regulatory constraints. If this case were typical, the Earth would
now be on a path to sustainability. Since, this is clearly not so, the configuration shown
in Figure 3 must be correct for a majority of businesses.
The response of many emergent approaches to reduction of environmental impacts,
such as The Natural Step, Zero Emissions and Factor 10 (Robert et al., 2002) is to
encourage and facilitate introduction to businesses of more effective technologies and
systems, and better skills in analysis and management. In terms of the model in
Figure 3, these innovations may be of two kinds, which it is essential to distinguish.
One of these categories of innovation can be understood by considering that the
representative firm is operating at a point such as E, which is technically inefficient. It
is in this state because governance and management lack either the knowledge or
technology to move to the opportunity frontier, or do not have the will or capability to
do so. The influence of environmentally-related management advice provides the
impetus required to move the business from E in the direction of C. This is one
explanation for the well-documented “win-win” outcome, in which improved
environmental outcomes also contribute wealth to the business (Nattrass and
Altomare, 1999). An example of this is recovery of waste solder from PCB assembly,
thereby reducing the toxicity of landfills while also reducing the costs of assembly
expenditure on solder.
It is important to recognise that this kind of innovation is highly desirable according
to the logic of the strict shareholder wealth perspective. However, if ethical stance (1) or
(2) prevails, the favourable environmental impact is possibly welcomed, but it is not the
prime motivator for the innovation. Moreover, the shift will stop at C, and no further
environmental improvement will be sought, even though the business is still operating
below the threshold of sustainability.
In the second category of innovation the business is already on the opportunity
frontier at C; it is technically efficient, and adjusted to maximise growth of shareholder
wealth. This innovation is quite different, because new technology, knowledge or
management expertise shifts the entire opportunity curve to FG. There could be an
expectation that this form of innovation will move the business from C to H, towards
the threshold of sustainability, or even over it. However, given corporate governance
based on ethical stances (1) and (2), this would be unjustified, because a governance
process that is strictly financially rational will shift the business to I. Even if a point
such as H is reached as a result of enthusiasm for the new practices, the governance
process will tend to pull the business back towards I, thereby reducing the earlier
environmental gains. This category of innovation also delivers “win-win” outcomes.
Part of this effect is only temporary, while adjustment to the new wealth-maximising
position takes place, but net environmental gains are achieved.
This type of innovation provides the opportunity for continual reduction of
environmental impacts through sequential emergence of new technologies that shift
the opportunity curve outward. An example could be continual reductions in the
energy requirements of a retail chain, through innovations such as introduction of Sustainability
natural light in stores, reduced packaging, and more efficient logistics. However, the
question of whether this progress will take the business above the threshold of
sustainability is essentially an empirical issue. Current evidence does not support the
view that the quest for global sustainability can rely on this approach.
Figure 4 shows drivers of these realignment processes that we suggest will operate in
parallel and with mutual reinforcement.
The compliance alignment process is the constrained retention of ethical stances (1)
and (2) referred to above, and is represented by the top pathway in Figure 4. Boven
(2003) concludes that this interventionist approach is the most likely path to global
sustainability. He also argues persuasively that achievement of sufficiently effective
Motivation for Alignment Alignment Process
Public awareness and Government Regulation Compliance
concern policy
Leadership
‘Ethical’ investors
The concept of natural capitalism (Hawken et al., 1999) is another proposed approach
to achieving global sustainability that accords with ethical stance (4), while also
adhering to the fundamental shareholder interests of ethical standard (2). This logic
suggests that, through the process of recognising the value of ecosystems to their
businesses, directors and managers will, in their own self-interest, ensure the
sustainability of the flow of services from these ecosystems. For this to happen, the key
shift is to an ethical stance that inherently embraces the requirement to value these
services, rather than treating them as an external free resource.
Conclusions
This paper has demonstrated why the mainstream ethical stance of corporate
governance – dominance of shareholder interests – is a contributor to the current
condition of unsustainability of the biosphere. Improvements in management practice
and technological innovation cannot be relied upon to achieve sustainability, so that
processes of realignment are inevitable. A model was presented, demonstrating seven
pathways to alignment of corporate governance to support global sustainability. One
pathway retains current mainstream ethical stances, which are increasingly
constrained by government interventions. The other six pathways describe
influences to which governance responds by shifting its ethical stance and changing
its business strategies. The seven pathways are likely to operate in parallel, with
corporate directors and strategic managers deciding on whether to await compliance
measures or to take more proactive approaches.
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Corresponding author
Wayne Cartwright can be contacted at: w.cartwright@auckland.ac.nz